An understanding of the role of land in the economy is urgently needed in order to resolve “the paradox at the heart of land ownership”, say the authors of a new book, Rethinking the Economics of Land and Housing (Zed Books, £14.99).
Tracing the history of the sector from the 17th century when enlightenment thinkers developed the notion that land could be turned into property, Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane show how land values have vastly increased since housing replaced farming as its primary economic use.
The result today is that “in the UK housing is by far the largest single source of wealth”, with dwellings (residential and commercial) valued at £4.43 trillion – 58% of the entire net wealth of the nation.
And the values are increasing: “since 1970 housing has accounted for 87% of the increase in the wealth-to-income ratio, and included in the measure of housing is the land that sits beneath the buildings”. Yet this wealth is decoupled from economic activity – rent-seeking involves getting a larger slice of the pie rather than increasing the size of the pie itself – and the result is a nation of housing haves and have-nots.
“There is a paradox at the heart of land ownership,” say the authors, whose fresh look at the topic comes with backing from the New Economics Foundation. “The spread of ownership of land has helped drive economic development, democratised power and spread wealth; yet, we argue, it equally has a tendency towards concentration and monopolisation of resources via excessive rent extraction with increasingly negative economic impacts at the aggregate level, even as the paper wealth of those owning property may increase.”
The issue is this: when the value of land under a house goes up, “the total productive capacity of the economy is unchanged or diminished because nothing new has been produced”. Diminished? Yes, because housing is both an investment good and a production good. We currently have a situation in London where 60% of average wages is spent on rent. This mean less cash is available to spend on goods and services, so the wider economy then suffers – people eat out less, buy smaller cars, take fewer holidays and so on. It’s not just individuals who are the mercy of this equation either – firms have to spend money on rent which could have been used for more productive purposes, such as R&D.
Ignoring the decreased flow of resources to the rest of the economy and only using accounting frameworks which measure the increasing wealth of landowners “has contributed towards the divergence between measures of wealth and the productive capacity of the economy”. And wealth inequality rises further when the previously public housing is switched into private ownership on a large scale because “it narrows the distribution of wealth even if house prices do not change”. That’s why “the average net property of the top 1% of households is £15m”.
The authors present a range of solutions to the issue which include tweaking the banking model towards “relationship banking” which has “stakeholder banks” with regional needs at their core, introducing a land value tax (“the most efficient form of property tax”), plus a shift in planning laws requiring developers “to ensure that part of the planning gain goes towards benefiting local communities”.
Some of these solutions are already being implemented, of course, but the point is that such measures need to be encouraged because if the sector is built solely around making profits for developers, banks and investors, the longer-term outcomes may actually not be in their interests – and there are signs that the current status quo is acting as a brake on an economy facing significant other challenges to its equilibrium.